ADVANCED ESTATE PLANNING & WEALTH PRESERVATION

Advanced Estate Planning Techniques:

When most people hear about more advanced estate planning techniques they assume that these techniques are only necessary if you are rich. While it is true that if you want to limit the amount of estate taxes your heirs may pay after your death, you should consider some of the more advanced estate planning strategies; there are also several other reasons why they may be the right fit for you and your family.

How can I limit the amount of estate taxes my heirs will have to pay?
• Revocable Living Trust:  If you are married and you want to do some estate tax planning then often the first step is a revocable living trust. However, that may not help you accomplish all your goals.
• Irrevocable Life Insurance Trust:  A common strategy to reduce or possibly eliminate the tax burden your heirs will have to pay out of pocket is an Irrevocable Life Insurance Trust (ILIT). An ILIT can take a life insurance policy you own and make the IRS consider it not part of your gross estate. Therefore, your estate will be smaller and less estate taxes should be due at your death. Alternatively, if you do not currently have a life insurance policy but you have an estate that may be taxable, you can create an ILIT, have the ILIT buy a life insurance policy on your life and when you pass, the money goes to your heirs tax free. They can use that money to pay off any estate taxes due.
• Grantor Retained Trusts:  There are several types of Grantor Retained Trusts, but the basic idea is the same for them all…you transfer assets to a Trust for gift and estate tax purposes and doing so will "freeze" the value of the assets you have transferred. So, any future appreciation will not be included in your estate. With Grantor Retained Trusts, you get to keep the right to receive some income for a period of time. After that period ends, the trust asses are either distributed outright to your beneficiaries or held in trust for their benefit. A transfer to these trusts is considered a gift for gift tax purposes, but because you have retained the right to benefit from the Trust, the valuation of the gift received by the beneficiaries is a fraction of the value of the assets you originally transferred. If you pass away before the determined period of time ends, the entire value of the assets in the Trust will be taxed as part of your gross estate. However, if you outlive the determined period of time, the assets you transferred into the Trust are not considered part of your gross estate.
• Qualified Personal Residence Trusts:  A Qualified Personal Residence Trust (QPRT) is a Grantor Retained Trust used to transfer your residence or your vacation home to your beneficiaries. During the determined period the QPRT is inexistence, you will be able to continue to live in or use the residence. At the end of the determined period, the residence transfers to your beneficiaries. If you outlive the determined period, the residence is not considered part of your gross estate.
• Intentionally Defective Irrevocable Trusts:  An Intentionally Defective Irrevocable Trust (IDIT) allows you to transfer assets into an irrevocable trust and thus get those assets out of your gross estate for estate tax purposes. However, the assets in the IDIT are still deemed to be yours for income tax purposes. So any income taxation will be paid by you and these payments will further reduce your taxable estate. This strategy helps minimize the estate taxes your heirs will have to pay, allows you to leverage gifts and allows you to lock-in the value of the assets for estate and gift tax considerations while passing all future appreciation of the assets you transferred to your beneficiaries.

Do some of these strategies sound complicated? Well, that is because they are! And there are many other advanced estate planning strategies out there that we can use to best fit your situation and your goals while also decreasing the amount of estate taxes your heirs will have to pay after your death.

My children are doing well. I want to leave my estate to my grandchildren for their education. That shouldn't be a problem should it?
• Often parents understand that their children probably won't ever need to rely on their inheritance to get by, so they want to make sure that their grandchildren are well taken care of. While this is an admirable goal, it has some pitfalls that you must plan for.
• If you leave your assets directly to your grandchildren, the IRS considers this a generation skipping transaction. In 2011, if you leave more than $1 million directly to your grandchildren, they could end up paying well over 50% of amount over the $1 million to the IRS.
• Dynasty Trust:  A Dynasty Trust allows you to leave the appropriate amount to your grandchildren without having to pay any estate or generation skipping taxes on the gift and allows the assets in the Dynasty Trust to grow to an unlimited amount and benefit your family for generations without them ever having to pay any additional estate or generation skipping taxes.

My daughter is a doctor. I'm worried she might get sued and lose all her inheritance. Can I protect her inheritance?
• Many parents worry about their inheritance not being preserved for their children. Some children have risky occupations and may face possible lawsuits. Some children have drug, alcohol or gambling problems. Some children have poor money management skills. Some children are in poor marriages that are likely to end in divorces. Any of these issues could cause the money you leave to them to be wasted.
• But you can protect the assets you leave to your family. If you create an appropriately planned trust for your children, you can protect those assets from any creditors or predators that may attempt to get at it.
• You children can still have a reasonable level of control over the assets. The investments will be there for their needs. But because it is kept in a trust for their benefit, it is not considered theirs. Thus, it becomes very difficult for any creditors or predators to take it from them.

Wealth Preservation Techniques:

We discussed above how you can create Trusts in order to protect your heirs from creditors and predators. Unfortunately, a simple Revocable Living Trust does not protect your assets from creditors or predators coming after you. But there are techniques we can use to protect your assets for you.

So, what are some common examples of creditors and predators? Generally, we can work with our clients to protect their assets from potential lawsuits, from future creditors, and from all of their assets going to a nursing home for their long term care.

Note that when we talk about wealth preservation, we are not talking about defrauding any current creditors or hiding your assets from a pending lawsuit and we are not talking about doing anything to defraud the Government or the IRS.

Limited Liability Company or a Family Limited Partnership: A Limited Liability Company (LLC) or a Family Limited Partnership (FLP) is an excellent tool to provide your with asset protection and wealth preservation. If you own a rental property or run any type of risky business where you are more likely to get sued than the average person, then you should seriously consider a LLC. If, for example, you owned a rental property we would create an LLC for you, deed the rental property into the LLC and then if a tenant or a guest sued you for something that happened at the rental property they could only reach the assets invested in the rental property. They could not reach any of your personal assets. Likewise, if someone sued your personally, they could not force you to sell the rental property. An additional benefit of creating a LLC or a FLP is that it can be an excellent tool to help reduce potential estate taxes your heirs may have to pay. By putting assets into one of these entities, you can actually devalue the assets in the eyes of the IRS. By putting certain restrictions on how the FLP is managed, you can get the value of the assets your transferred into the FLP discounted for tax purposes, sometimes up to 40%.

Virginia Business Trust:  The Virginia Business Trust (VBT) is a relatively new and underutilized entity. It offers similar asset protection as a LLC or a FLP but it can be even more flexible. It also offers the additional advantage of being able to have "series". What that means is that if you were to transfer multiple rental properties into the VBT, you could separate the liability from each one. If you had three rental properties in one LLC, if a tenant sued you based on something that happened at one of the properties then he could potentially force you to sell all three in order to pay off a judgment against you. However, if you put the same three rental properties into a VBT, the judgment would only come from the property where the accident occurred. VBTs also offer more privacy to clients that do not wish the public to know that they have any interest in certain assets.

Irrevocable Trusts: If you transfer assets into a correctly drawn up irrevocable trust then you actually lose all ownership rights to the assets. Thus, if you are sued in the future or run into credit problems or you have to move into a nursing home for a long period of time, no one will be able to reach the assets in the irrevocable trust. However, note that if you transfer assets into an irrevocable trust it is considered a gift. So, you need to consider gift tax consequences and review the gifting look back period for Medicaid.

There are several other techniques that may help provide you with wealth preservation and/or asset protection. In addition to these techniques we will also be happy to talk with you, your accountant and/or your financial advisor to discuss ways we can legally help you to reduce the amount you are paying in income taxes (e.g., donating to charities, transferring assets into retirement accounts, etc.).